Archive for May, 2006

2006-05-30 :: Goldman Sachs Calls $100 Oil

Tuesday, May 30th, 2006

Goldman Sachs calls for oil to top $100 per barrel and what happens?  Oil stocks sell off.  Today was one of those days that nothing worked.  My entire screen was red today showing falling prices in everything.  Energy stocks started off strong in the face of all other sectors falling, but turned down when the rest of the market cascaded down.   The chart above shows you the Oil Service Index activity today.  The day began well with the index up 1.5% but fell and ended down 2%.  It simply makes no sense.

The fundamentals in the energy sector are as strong as ever.  Thursday, you have the OPEC meeting in Caracas.  Venezuela has been calling for production cuts from the organizaiton, and may hold some sway over the other members.   This helps establish a floor under oil prices and furthers momentum in energy company earnings.  This weakness is a real buying opportunity for anyone that has an underweight or even market-weight position in energy stocks.

This current selloff is a temporary event.  The fundamentals of the stocks we own will prevail, but in the interim, it is a rocky time.

I have been working on my next Investment Strategies newsletter.  In it, I will address what caused the current selloff and why the major trends we’ve been investing with are still in place.  I hope to have it out in the next week or so, but until then, keep checking here for my current thoughts and actions.

Mark

2006-05-30 :: Post Holiday Selloff Likely

Tuesday, May 30th, 2006

Asia and Europe have been down Monday and Tuesday, and S&P Futures are down, so its likely that we’ll see the US markets open down today.

I’m still looking for my buy-in point for JOYG as well as trying to make a decision on BRCM, MRVL, INTC, and TER (see last week’s blog entries).

JOYG had its bounce back after the big fall and is almost back to its pre-drop level.  It will likely pull back again and that’s when we’ll jump in.

The options backdaters above are a tougher call.  None of them have been charged with it, and they may never be.  However, the pattern in their options issuance and their stock price is going to bring a lot of scrutiny to them, which will keep their share prices under a cloud for the forseeable future no matter what their earnings stream looks like.

More later as the markets beging to move.

Mark

2006-05-26 :: Enron Lessons Don't Sink In

Friday, May 26th, 2006

The market had a great day today.  The volume was much less than the last two weeks, but we did go into the holiday weekend on a happy note in terms of the broad market’s rally from earlier lows. 

Unfortunately, we had an ugly juxtaposition in terms of corporate greed this week as we saw
that executives from Enron and Fannie Mae get their punishment while several other companies have been targeted for their presumed practice of backdating executive option granting to recent stock price lows.

Below, I’ve cut/paste a story that outlines my current disgust with this sector of corporate America.

From Business Week Online:

Backdated Options, Future Rules?

By David Henry

(Exerpt from a longer story) …

Last week, the Center for Financial Research & Analysis [CFRA], an accounting research firm that red-flags stocks for institutional investors, said in a report it had looked at 100 companies that issued a lot of options and found 17 companies that on at least three occasions had awarded options at, or close to, 40-day lows in stock prices. CFRA said that while the 17 have the “highest risk of having backdated options,” it has not confirmed any backdating.

NO PROOF.

The 17 companies were American Tower (NYSE: AMTnews) [AMT], Broadcom (NASDAQ: BRCMnews) (BRCM), Brocade Communications (BRCD), CNET Networks (NASDAQ: CNETnews) [CNET], Delta Petroleum (DPTR), F5 Networks (NASDAQ: FFIVnews) (FFIV), Juniper Networks (NASDAQ: JNPRnews) (JNPR), McAfee (MFE), Medarex (NASDAQ: MEDXnews) (MEDX), Mercury Interactive (NASDAQ: MERQnews) (MERQ.PK), Microstrategy (MSTR), Openwave Systems (NASDAQ: OPWVnews) (OPWV), Rambus (NASDAQ: RMBSnews) (RMBS), RSA Security (NASDAQ: RSASnews) (RSAS), Semtech (SMTC (NASDAQ: SMTXnews) ), Sepracor (NASDAQ: SEPRnews) (SEPR), and Zoran (ZRAN).

Monday, Joe Osha, an semiconductor industry analyst at Merrill Lynch (NYSE: MERnews) , reported in a note to clients that the stock prices of six companies in the Philadelphia Semiconductor Index had surged by an average of at least 14% in the 20 days following options grants in 1997 through 2002.

FAR-REACHING CONSEQUENCES.

The six were KLA-Tencor (KLAC), Marvell Technology (MRVL), Novellus Systems (NASDAQ: NVLSnews) (NVLS), Linear Technology (NASDAQ: LLTCnews) (LLTC), Broadcom (BRCM), and Maxim Integrated Products (NASDAQ: MXIMnews) (MXIM).

None of the companies or individuals named in the reports has been proven to have done anything illegal.

As you can see from the lists above, two of my favorite companies (BRCM and MRVL) are being implicted.   Additionally, the full list from Merrill includes Teredyne and Intel.  Management has a fiduciary duty to act in their shareholders best interest.  It sure looks like a repeat of the Enron/Fannie Mae corporate greed scenario to me. 

From my years in this business, one thing I’ve learned is that news stories like these have legs that will keep the stock price of a company hindered for a period of time; if the story turns out to be true (e.g., Enron, Worldcom, Tyco) then the  shareholders are better off selling  and moving on instead of holding the stock hoping for a rebound that might neve come, or that might come years in the future.

Next week, we’ll be analyzing this scenario and deciding whether to liquidiate holdings of these four companies based upon this assumption.

[Getting Off Soapbox]

The graphic above is one you seem a lot here recently:  VIX – Volatility Index.  As you can see, our oversold position has abated and we are now at the level where we were in January when that major rally started.  Clearly, the upward strength is lessening, but it still seems as if we have some room to run.  As we move into next week, we have a major event Tuesday afternoon as the minutes of the Fed’s meeting earlier this month are released and we get to see if the Fed is becoming more or less interested in increasing interest rates.

The market will likely either rally or drop in a fairly strong manner depending upon what people interpret.  If it looks like they are going to pause, then you’ll see the market move up; if they seem to be set to increase the rate hikes for the foreseeable future, then look for the market to drop in spite of the still-oversold position.

Next week has the potential to be as active as this week.  As always, we will do our best to capitalize on any trends we see that will benefit our clients’ portfolios.

Have a nice Memorial Day weekend!

Mark

2006-05-25 :: No JOYG in Mudville

Thursday, May 25th, 2006

Sorry for the bad pun in the title, but many of you know that one of my best performing holdings over the past 3 years has been Joy Global (JOYG).  What better company could you own that one that manufactures heavy machinery for the metals and coal mining industry.  Today, they reported net income that more than doubled from a year previous, they have orders backlogged that they can’t keep up with (i.e., future earnings increases) due to some of their suppliers not being able to keep up with JOYG’s needs and due to mine operators having trouble getting permits to open new mining operations.  None of this sounds bad to me.  What this says is that the metals and coal industries are H-O-T hot and our money is in the correct industry.  This is clearly a buying opportunity for JOYG, and once the share price stablizes I’ll be adding to current positions and establishing positions for clients that don’t yet own any.

With this small exception, today was a decent day for the market.  Yesterday, I wrote that I would feel a lot more comfortable with the potential for a rally if we had an up day that ended on the day’s high.  Today, we had very nearly just that.  The market market moved up and stayed up all day – a good sign.  The VIX-Volatility Index that I’ve written about lately moved down to a less-oversold position today, yet it is now in roughly the same positon as last October’s selloff peak, prior to the major move upward in the markets going into January.  

This rally should have more legs to it.  It won’t be a straight shot back up, but we should see a trend of strength, particularly in the energy stocks.

Mark

2006-05-24 :: Volatility Continues

Wednesday, May 24th, 2006

As I look at my screen to see where the day ended, I see a lot of red.  A number of companies that were up early in the day ended down, and the traditional defensive stocks all seem to be up.

From an intuitive standpoint, the traders in New York all seem to be saying that we’ll never need any additional oil exploration as people have found religion in terms of gasoline usage or that we have plenty of copper, zinc, and nikel on hand for the future.   It makes no sense.  The fundamentals are still in place that started the bull market in commodities, particularly for the energy companies.  Most energy companies share prices reflect earnings estimates based upon $45 or $50 oil, not $60 or $70 oil.  When earnings are posted, they will inevitably be higher than estimates.  But no one ever said a market selloff was a rational thing.

 Monday, I provided a chart of the VIX-Volatility Index, saying that the market has hit the most oversold position since 911.  We did get a bounce yesterday, but it weakend as the day wore on.  Bird flu news and inflation expectations took the buyers to the sidelines and the market ended down for the day.  The chart today looks even more oversold and indicates that a rally is coming.  What we need to see, though, is that the market ends at its highs for the day to give Asia and Europe some momentum overnight.

The chart above is an is a two-year graph of the CBOE Oil Index.  Oil and metals have been hammered hard by the selling.  The value in these stocks now is truly compelling:  Apache with a P/E of 7.15 and a PEG of 0.71; Consol Energy with a P/E of 12.19; Helix Energy Solutions with a P/E of 9.04 and a PEG of 0.29; Nabors with a  P/E of 14.59 and a PEG of 0.23. 

If you are not familiar with PEG as a valuation ratio, it is (in my opinion) a much more relavant tool than simply using the P/E .  PEG includes earnings growth in the calculation and tells you, for example that Nabors earnings growth for neighbos is significantly higher than the P/E Ratio.  A PEG of 1 means that the earnings growth rate and the P/E Ratio are exactly the same.  A PEG of less than 1 means the earnings growth rate is higher than the P/E Ratio (this is a really good thing because it means you are buying a company with very strong earnings and you are paying below fair value for that company).  In Nabors case, their earnings growth rate is estimated to be 63.43% for the coming year, which when divided by the P/E of 14.59, gives you the PEG of 0.23.  Anytime you can buy (or own) a company that has earnings growth of 63.43% and only pay 14.59 times earnings for it, you are getting/owning a bargain that should increase in value.

Comparing Nabors to Google, Google has a forward P/E of 30.53 and a PEG of 1.31.  This means that you are buying a company with an earnings growth rate less than its P/E Ratio.   In a balanced portfolio, there is room for both of these companies.  The deep value in a Nabors along with the growth propects for a Google complement each other. 

Unfortunately, what the market is saying right now is that exploring for energy is not a worthwhile business at this time.  I couldn’t disagree more and am a buyer of Nabors at this price.  The upside seems significantly higher to me than the potential downside, so I’m willing to weather this storm and wait for the hedge funds and mutual funds to stop selling, and the volatility to ease up, so that the bull market in energy can commence.

The chart shows that over the last two years, we’ve always had times when energy has sold off.  The short-term players get out, the investors that buy on the fundamentals see value and buy, and the bull market continues.  Its tough weathering the storm while its happening, but ultimately the fundamental investors win as the oversold holdings march forward.  The supply/demand imbalances are not going away, even if US economic growth slows for a quarter or two due to higher interest rates.  Owning a company with > 60% earnings growth  that you buy when its undervalued will always make you money in  the end.

Hang in there as we await the turn around.

Mark

2006-05-23 :: Tuesday evening – W. H. O., Bird Flu & and You

Tuesday, May 23rd, 2006

The World Health Organization released information today about potential human to human bird flu transmission in Indonesia.  Several members of the same family have died from bird flu, including three who shared the same sleeping room.  Although they came up short of saying that  it was definitely human to human transmission, the implications seem to have scared the markets at the end of the day as much of the big gains from earlier were lost.  The Dow dropped by 28 points, although the oils and metals were mostly up, with the exception of aluminum and iron ore.

The bird flu story is a big one.  If human to human transmission is confirmed, this will be very bullish for gold and gold miners.  Before this story became front page news and we were seeing rumblings of it in The Economist and other publications, we started adding small postions to portfolios in gold miner Barrick Gold (ABX) and streetTracks Gold Shares (GLD) as insurance against some bigger event.  Luckily, this was also when gold was in the mid-$400’s per ounce and our insurance has paid off without any major crisis having occurred.   Additionally, we’ve added where feasible shares of Gilead Sciences (a biotech with a bird flu vaccine in the works) and Premium Standard Farms (PORK), a pork producer who would see their earnings rise as poultry gets shunned for other meat products in a bird flu scare. 

I’ve also been watching other other biotechs and pharmaceuticals that are working in this area, and in fact we owned Chiron for awhile in some accounts until they were purchased by Novartis.  Most of the companies are too small or illiquid for us to own safely in clients’ behalf.  However, if you are investing your own funds in an online account or in some other manner, there were two of these that skyrocketed ahead this afternoon on the news out of the WHO:  Novavax (NVAX) which was up almost 12% and Generex Biotech (GNBT) up just shy of 11%.  They might be worth your research efforts if you believe this bird flu human to human transmission story is more than presumption by the WHO.  We will likely be looking for an entry point into Novartis as an additional hedge against this potentiality.  It will also be a nice hedge against the dollar bear market as it is a Euro-based company whose ADR’s we buy here in the states.

As I write this, the Japanese market is up over 1%.  If Europe is up over night as well, maybe we can shake off the drop in the last hour of our market caused by the bird flu scare.  Oil touched above $72 per share based upon the hurricane predictions announced today, closing a bit below that.  Copper also closed above $3.60.  Even though the rally in the broader market stalled today, the sectors in which we are overwieght in client portoflios finished strong.  We’ll see if the broad market rally can shake off the bird flu news and rally for real tomorrow, while our favorites hopefully continue to move forward.  As for NASDAQ, it might be getting cheap enough for me to look at Google (GOOG); at a 1.26 PEG Ratio, its almost a value stock (I’m only half kidding).

Thanks for reading!

Mark

2006-05-23 :: Tuesday's activity

Tuesday, May 23rd, 2006

The rally we’ve needed has finally hit and there are some companies we own that have moved up sharply.  DrilQuip is +6%; Tenaris is +7%; Phelps Dodge is +7%; Southern Copper is + 6%; Titanium Metals is + 11%; Gardner Denver is +4.5%; Joy Global is +7%; Consul Energy is +5%, to name a few.

I’ve used the strength in the copper stocks to take some profits in Phelps Dodge and Southern Copper, and the strength in the oils to take some profits in the majors and the natural gas pipelines, to redeploy into the three areas that I think we’ll see the best upside through year-end:  oil services (Nabors, Gardner Denver, Grant Prideco, Haliburton); construction (URS, Foster Wheeler, Haliburton); and late cycle industrials (Ingersoll-Rand). 

The added benefit of these companies over the sales that were made, in addition to better upside potential, is that they have an earnings stream that should not be negatively impacted by a slowing US economy.  If Fed interest rate increases continue, there is a possibility that US economic growth will slow.  This will likely slow the demand for copper (the US is still a big user of copper), but not so likely to slow the demand for oil (the supply/demand imbalance in oil, along with the likelihood of negative geopolitical circumstances, will keep oil prices higher than Wall Street Estimates).  These should be good defensive equity positions; unfortunately, as we’ve seen over the last two weeks, all stocks can go down when there is a selling frenzy.  The key is figuring out which stocks to buy that have the best combination of potential growth for current value.

I am concerned about the tech sector, though.  The chip stocks that looked like they had found a bottom to their slide late last week are down today, with Broadcom being down big yesterday.  There is a lot of negative press about tech companies’ manipulation of their executives’ compensation through the timing of option grants.  From what I’ve read there is no actual proof, just a lot of circumstantial evidence that is pretty telling.  I’m beginning to wonder if this will hang a cloud over this sector for the forseeable future.  We’ll see later in the week if today’s rally can push into these growth stocks.

Mark

2006-05-23 :: Tuesday overnight update

Tuesday, May 23rd, 2006

Yesterday’s decline was fueled by the overnight declines in Europe and Japan.  There should hopefully be better news today as Europe rallied nicely and, although Japan was down overnight, S&P upgraded Japan to positive from neutral for investors.  The European rally was led by oil and miners as oil popped back up above $70 per share.  We may just get the rally I mentioned yesterday a day or two earlier than I had thought.  The big worry for me is that two of my favorite holdings, miner BHP Billiton and the worlds largest bank Mitsubishi UFJ, were both down big in Asia.  We’ll see if this is a rally with a rising tide that lifts all boats.

We are in the midst of implementing the plan discussed in Sunday’s entry. 

More later.

Mark